Perfect Competition

Question 1

Perfect Competition (Price Taker)

Answer 1

The individual firms demand schedule is perfectly elastic (horizontal); D=MR=AR

Production: Expand until MR = MC

Produce P=MC

Question 2

Price Taker Demand

Answer 2

Expand prod. until MR = MC

MR is the increase in TR from selling one more unit of a good or service

MR is simply the price under perfect competition because all additional units are assumed to be sold at the same (market) price

Pure Comp D; D = P = MR

Question 3

Economic Profit Maximizing Output for a Price Taker

Answer 3

Produce and sell the Q;output for which MR=P

Economic profit = TR - Opp. Cost of Production;cost of a normal return to all factors of production, including invested capital.

Question 4

Maximize econ profit in the SR

Answer 4

Produce Q where MR = MC; where TR>TC by the max amount (between breakeven points of TC and TR at greatest point where TR is > TC)

Question 5

Short-run loss

Answer 5

Economic loss; MC>MR: Reduce output to where MR=MC

Question 6

Short-run supply curve

Answer 6

In equilibrium, each firm is producing the quantity for which P=MR=MC=ATC (ATC is a function of low barriers so firms enter, increase S, drive down P so that P=ATC)

No econ profits, ATC is at minimum where ATC = MC

MC>AVC, where Economic profit is realized, and P2 > P1

Perfectly elastic, horizontal

Question 7

Equilibrium in a Perfectly Competitive Market

Answer 7

ATC>P, economic losses (one solution;downsize;decrease plant size)

ATC>P>AVC, continue operations in SR

P=ATC, Shutdown points

AVC>P, firm is not covering variable costs; shutdown (0 output); layoff workers; limits losses to fixed costs(building lease and debt payments)

Question 8

Effect of a permanent Inc in D under perfect comp

Answer 8

Econ profits>entry> S shifts right and down, -P +Qs> Firms TR and Econ profit will decrease because +Qs drives -P

some firms exist so -S, +P, and TR increase as firms take adv. +P

Permanent change in demand.

Normal profit; econ profit = 0; MC=MR=P, and ATC is at min

Question 9

Long run Equilibrium Output for a price taker

Answer 9

MR = MC = ATC, which is where ATC is at min;Econ profit = 0; Normal returns are realized

Question 10

Short-run Market Supply curve

Answer 10

+P, entry = +S =+P, until it competes back down, again

Question 11

Changes in D (will effect entry, exit, and plant size) SR adjustment to an +D under perfect comp

Answer 11

SR +D;D shifts right; +P, +Q = economic profit LR, +Scale of Ops, +Entry

SR -D;Left shift; -P,-Q -Scale of Ops, Exit